Aging Workforces and the Politics of Immigration

The Clash Between Politics and Reality

There is an interesting dichotomy between the perception and value of immigrants in societies. To be sure, there are phases of history when immigration is a drag on the host economy, providing excess capacity and driving down wages. There are other periods of history when countries need immigrants to accelerate their economies, filling roles that need to be filled in order to achieve productive capacity.

As the demographic trend in developed economies plays out and populations age, there will be a shortage of workers in a number of countries. This trend will manifest in Japan and Western Europe before the United States, but it is a reality that most developed nations are facing now or will face in the next 20 years. These countries will have three primary options: to invest in robotics to lessen labor requirements, to incentivize immigration to bring more workers into their countries, or to accept lower economic growth.

From an objective standpoint, the most feasible course of action is to pursue a course of immigration reform to bring in more workers while facilitating technology investment, hoping that the latter results in increased productivity per worker. This assessment, however, fails to take into account the political and social challenges associated with immigration. The need for countries to incentivize immigration and the politics of actually implementing these changes are inherently difficult to reconcile.

Europe provides some notable examples of these challenges:

• The average fertility rate across the continent is 1.55 births per woman of childbearing age; 2.33 is considered to be the global replacement rate.
• Spain has a fertility rate of 1.27, and has been shrinking in population since 2012.
• The National Institute of Statistics projects that Portugal’s population will shrink from 10.5 to 6.3 million by 2060.
• Italians over the age of 65 are projected to grow from 2.7% of the population in 2014 to 18.8% in 2050.
• Germany had the lowest birthrate in the world from 2008-2013, with only 8.2 births per 1000 people, according to the HWWI. The German government projects the population to drop from 81 million to 67 million in 2060. The UN projects that only 54% of Germans will be workforce participants in 2030. Approximately 533,000 immigrants would need to enter Germany every year to keep the population flat.

These are undoubtedly serious issues for the German people. One can certainly argue about the ideal population and economic sizes and growth rates, but when a population becomes so unbalanced that its workforce and tax base can no longer support entitlement programs for retired citizens, it becomes a national problem.

Source: United Nations

Compare this reality with the reception that has accompanied German Chancellor Angela Merkel’s program to accept 800,000 Syrian refugees into Germany. In total, Germany took in around 1.1 million refugees in 2015. Public reception to this program has been unfavorable, to put it lightly, and popular support for Merkel has dropped to a 4.5-year low. There is certainly a difference between a society’s willingness to accept immigration broadly and their willingness to accept a specific group of destitute and ideologically different people, but this example highlights the political challenges of immigration.

To some extent, this represents a divergence between big and small, or idea and implementation. At the macro level, many Germans likely agree that a thoughtful immigration policy, designed to ensure that the economy continues to function and that they will receive their share of retirement benefits, is a necessary measure, and perhaps a good idea. However, it is different at the micro level, when Syrian refugees are relocated into German towns and, for example, commit violent crimes — even as some degree of crime would be expected from any similarly sized group of people.

While people in general understand macro, long-term issues, they tend to vote according to local, short-term micro pressures. This truism represents a structural challenge for public sector officials in free societies, who have the mandate to plan for the long-term success of their constituents but are held accountable by short-term voter preferences.

There is an interesting parallel between the operating reality of public sector officials and business executives at publicly traded companies, who are also held accountable to short-horizon numbers (quarterly earnings) in what are often long-horizon industries. Executives in both realms have the difficult, and sometimes impossible, task to thread the needle between succeeding in the short term while preparing for the long term. If executives ignore the short term and focus entirely on the long term, they will get fired or voted out of office. Conversely, if they focus only on the short term while ignoring long-term issues, they will fail their constituents and potentially destroy their respective enterprises.

This chart depicts the ratio of working age (20-64) to retirement age (65+) population, using the United Nations actual and medium variant projections.  Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision.